1. General Overview

The Central Bank of the Republic of Turkey has adopted the Capital Movements Circular (“Circular”), which came into effect on May 2018.

As also explained in other sections of this issue and in previous issues, starting from the last quarter of 2018, Turkish lawmakers concentrated on putting in force new regulations for protecting the value of the Turkish Lira by way of regulating transactions where foreign currency may and may not be used. This Circular also serves the same purpose which is to protect value of the Turkish Lira through monitoring export and import of capital and marketable securities in and out of Turkey and also setting out rules for utilization of foreign currency loans.
Among other matters, the Circular stipulates the rules and principles regarding utilization of foreign exchange cash and non-cash loans as well as utilization of intercompany loans. As a general rule it is allowed by the Circular to utilize intercompany loans, however, there are also certain rules and technical details that should be considered while utilizing such loans. To begin with, an intercompany loan shall not bear the characteristics of renewable/revolving loans. Term and interest rate of an intercompany loan should also be definite.

In this article we will explain utilization of loans between group companies as per the Circular.

I. Definition of Group and a Group Company

The Circular does not provide a definition of a “group” or a “group company”. Therefore, the definition should be determined according to the TCC and its secondary legislation. As per the TCC, in order to state that there is a “group of companies” there needs to be a “dominance relationship” between at least 2 (two) companies.

A “dominance relationship” can be established in case a company (dominant company) controls another company (dependent company) through:

- directly or indirectly holding the majority of voting rights in the dependent company, or

- holding the right to appoint the members to the management body of a dependent company under the articles of association in a number that constitutes the majority to make decisions, or

- having the majority of the voting rights of the dependent company alone or together with other shareholders or partners based on an agreement, or

- keeping the dependent company under its control in accordance with an agreement or through other means.

In the event that a company controls the other company, these 2 (two) companies are deemed to be “group companies” within the meaning of the TCC.

II. Obtaining Intercompany Loans

The Circular obliges legal entities residing in Turkey to have foreign currency revenue in order to obtain a foreign currency loan. However, the Circular also introduces a number of exceptions to this general requirement to have foreign currency revenue to receive foreign currency loans.

One of these exceptions is that companies residing in Turkey which are fully owned by foreign companies may obtain foreign currency loans from their foreign group companies residing abroad, although they do not have foreign currency revenue.

Even if the Circular grants a certain level of freedom with the aforesaid exception, Turkish companies that fall within the scope of this exception should, in any case, comply with various requirements to receive foreign currency loans from their foreign group companies. In this respect, the Circular stipulates certain documentation requirements for Turkish companies to utilize foreign currency loans from their foreign group companies. Accordingly, the Turkish resident company must provide the intermediary bank with (i) loan agreement, (ii) repayment plan, and (iii) trade registry gazettes and letters issued by the relevant authorities and confirming its shareholding structure, in case it obtains foreign exchange intercompany loan from:

(a) The creditor company residing abroad which fully owns the borrower; or

(b) The creditor company residing abroad is a direct or indirect fully-owned subsidiary of a company residing abroad and indirectly owns 100% of the borrower.

In the latter case, the Turkish resident company (borrower) must also submit documents showing the shareholding structure of the creditor company to the intermediary bank.

III. Providing Intercompany Loans

According to the Circular, Turkish residents may provide foreign currency or Turkish Lira denominated loans to partnerships in which they are shareholders, parent companies and group companies residing abroad.

Similar to obtaining foreign exchange intercompany loans, the Circular stipulates certain requirements for Turkish resident companies to provide foreign currency or Turkish Lira loans to the abovementioned companies residing abroad.

In this respect, such loans must be transferred abroad via banks. In other way of saying, Turkish resident companies cannot provide intercompany loans without making a bank transfer. The Circular also stipulates certain documentation requirements for Turkish resident companies providing intercompany loan.

Accordingly, Turkish resident companies are required to submit the following documents to the intermediary bank: (i) loan agreement and (ii) trade registry records showing the dominance relationship between the Turkish resident company and the company residing abroad.

Finally, it is also important to state that such loans may be transferred directly to the beneficiary's account abroad or in Turkey, in Turkish Lira or foreign exchange currency.

IV. Conclusion

On the one hand, the Circular aims to introduce certain rules for utilization of foreign currency loans and to establish a flow of information for credit activities of the companies in order to observe the import and export of Turkish Lira and credit activities of the companies in foreign currency. On the other hand, the Circular exempts group companies from certain rules and specifically addresses intercompany loans, which are commonly, used financing instruments both in Turkey and globally thereby ensuring that group companies do not suffer because of the general rules stipulated in the Circular.

The documentation requirements for group companies to obtain and provide foreign currency loans that are introduced by the Circular may also be motivating for group companies to comply with tax laws since there are a number of tax matters that the group companies must take into consideration and evaluate in detail when utilizing intercompany loans.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2019. A link to the full Legal Insight Quarterly may be found here